IRS could face glut of health law tax appeals

A watchdog is urging the IRS to make sure it is prepared for an anticipated blitz of taxpayer appeals involving dozens of new tax credits and penalties under President Obama’s health care law.

In an audit released Thursday, the Treasury’s inspector general for tax administration said the IRS appeals division is doing some preparation, but that it should take a more formal approach to make sure it’s ready to handle heavier caseloads in 2014 — the year when key provisions of the Affordable Care Act go into effect.

Last summer, the appeals division assigned an analyst to manage appeals related to the Affordable Care Act, according to the audit. It also created an internal website to help employees handle issues related to the health care law and dispatched employees throughout the rest of the agency to observe preparation efforts.

But the division has also been receiving a greater volume of taxpayer appeals, unrelated to the provisions of the health care law — a situation that makes adequate preparation even more important, the inspector general warned.

“Currently, (the appeals division) is faced with growing case receipts and inventory backlogs in existing workload, which affects its ability to work cases as quickly as taxpayers would like,” the report said. “As a consequence, the ACA has the potential to significantly impact appeals operations with new case receipts in addition to an already growing workload.”

The report comes on the heels of an overwhelmingly positive audit last fall, where the inspector general found that the IRS appears to be on track for meeting the new technological challenges posed by the new health care law.

The agency faces numerous challenges as it undertakes the largest set of tax law changes in 20 years.

Under the new health care law, individuals must obtain minimum health coverage and large businesses must offer coverage to their employees. It will be the IRS’ job to collect penalties from those who fail to do so.

And with the advent of new, state-based insurance exchanges, the agency will pay tax credits directly to insurers to help income-eligible Americans afford coverage. It will also be responsible for delivering credits to small businesses who provide coverage for their employees.

All of this brings new opportunities for taxpayers to appeal.

As of August, the IRS hadn’t yet received any health care-related appeals, even though some provisions of the law have already gone into effect,

But that’s expected to change two years from now, when the individual mandate goes into effect and the insurance exchanges are scheduled to be up and running.

Tim Jost, a law professor and health care expert at Washington and Lee University, said he expects the tax credits offered through the insurance exchanges to be the most problematic for the IRS to implement.

“I think the biggest challenge they’re going to face is dealing with the advanced tax credits. There will be literally millions of people who are going to be receiving those,” he said. “Setting up the mechanism for paying insurers for millions of people on a monthly basis is going to be a huge challenge.”